#$spls

Walmart (WMT): It has been no secret that Walmart is trailing Amazon as an ecommerce retailer. Its acquistion of Jet.com is a direct message to Amazon that they are coming for them. In FQ2 2017 online sales rose 11.8%, much better than the 7% increase recorded in the prior quarter. Along with boosting online sales the company is focused on creating a better customer experience and lowering prices even further. These initiatives might generate sales but they will also pressure margins in the short-term.

Same store sales have come in positive for eight consecutive quarters, driven by 7 quarters of increasing traffic. Walmart’s biggest advantage over Amazon and other online retailers is its expansive grocery and fresh food offerings. Walmart’s are often considered one stop shops for families to do their weekly grocery shopping and to pick up anything else they might need. The adoption of these services amongst online retailers have yet to gain traction. Amazon is of course testing this out as part of its Amazon Prime services. In the meantime, Walmart, Target and Costco will have the upperhand in this segment.

In preparation for its biggest quarter of the year, Wal-mart just announced it’s plans for Black Friday. The holiday shopping event will begin at midnight on Nov 24, and will offer “something for everyone – from $1.96 movies to a $30 Sharper Image Video Drone and a $798 65-inch Samsung HDTV.”

Best Buy (BBY): In the last couple of years, many have written off Best Buy as a showroom for Amazon. The rising popularity of online retail has really taken its toll on the electronics store in recent years, forcing the company to expand its omni channel capabilities and push more frequent discounts to compete in the rapidly changing environment. This has taken its toll on quarterly results in the form of higher operating expenses and lower margins. However, bottom-line growth still appears to be intact, a trend that analysts expect to continue into Q3. Revenue growth is where the concern lies, still expected to come in flat for the second quarter in a row.

While comparable store sales only increased 0.8% in Q2, comparable online sales up-ticked by an impressive 24%.  Strength in wearables, home theater, appliances and computing have kept growth afloat while phones and gaming suffer. With the popularity of the iPhone 7, investors will be looking for signs that the latest iteration of the smartphone boosted overall sales as the retailers heads into its most important quarter of the year.

The J.M. Smucker Company (SJM): Strong organic sales growth, product innovation and constant efforts to expand through acquisitions have led to robust quarterly results over the past year. The second quarter though was a bit of a surprise to investors who had become accustomed to large beats and robust growth. Revenue missed analysts estimates by a wide margin in part due to lower demand and unreasonably high expectations. Shares have been trading lower since then but are currently higher on the year. The acquisition of Big Heart Pet Brand, launch of Dunkin K cup pods, and expanding distribution of key pet brands will help support top line growth. Meanwhile lower coffee prices are expected to result in greater performance for its overall coffee business in fiscal 2016.

Children’s Place (PLCE): Shares of PCLE are soaring in the past week after analysts at Bank of America upgraded the stock to buy just ahead of its earnings report. Its recent history of topping analysts estimates coupled with robust growth rates have led to a 60% in the stock this year. Despite ongoing woes in the retail environment analysts are optimistic that Children’s Place can pull out another victory tomorrow. The retailer has found success in its mall-based stores, something you don’t find many other retailers claiming anymore, while maintaining a very modest store openings and closure process. Any projections on holiday season sales will have more bearing than the actual results.

Staples (SPLS): Staples business model continues to be hurt by wider adoption of Amazon as well as the abandonment of pen and paper in favor of digital note taking. Staples of course doesn’t only offer office supplies but has seen a major pullback in recent years from the technological advancements offing its core business. To top it off, currency headwinds and economic uncertainty in Europe are playing a key role in its misfortunes. Shares are down 30% in the past 12 months and typically trade lower immediately through an earnings report.

Miscues with Amazon exec may have doomed effort to show online giant won’t disrupt office market.

by David Marcus

The Federal Trade Commission's effort to block the proposed merger of Staples Inc. and Office Depot Inc. has been a rocky one. Staples concluded its defense on April 5 without calling a single witness. Diane Sullivan, Staples' lead lawyer and a partner at Weil, Gotshal & Manges LLP in New York, said in her closing argument that the FTC had "failed utterly" to identify a single specific market where competition would be harmed by the $6.3 billion merger of office supply companies. Staples' gambit was very unusual and suggests its confidence in its case.

Arbitrageurs agreed; Office Depot stock jumped 35% during the 10-day trial, while Staples stock rose 8.8%. Those hikes reflected comments made by U.S. District Court Judge Emmet Sullivan in Washington during the course of the 10-day antitrust trial, which began March 21. The judge was skeptical of the FTC's argument that the deal would harm competition in the market for sales of consumable office supplies to companies that buy at least $500,000 of such goods every year. He wondered why such large businesses couldn't look after their own interests and seemed more focused on potential harm - or lack of it - to individual customers than to large businesses.

And he criticized the FTC harshly on March 23 for suggesting that Prentis Wilson, vice president of Amazon Business, submit a declaration in the case saying that Amazon.com Inc. might not be able to compete in the market until early next year. Wilson testified that wasn't necessarily the case, and Sullivan called the FTC's behavior "very disturbing." Although it is standard operating procedure for antitrust officials to provide suggested language for declarations in these instances and the subjects are free to change them as they see fit, the agency never seemed to recover the credibility it lost in the eyes of the judge.

The difficulties the FTC faced at trial were so fundamental to the FTC's case that they call into question the government's decision to bring the case in the first place. At the most basic level, the FTC may have felt that it had to challenge what it saw as a merger of the nation's two largest sellers of office supplies-a two-to-one merger, in antitrust terms. But in 2013, the FTC decided not to oppose Office Depot's 2013 purchase of Office Max Inc.

The FTC often challenges so-called three-to-two mergers, but in that deal found that large customers "use a variety of tools to ensure that they receive competitive pricing such as ordering certain products." The FTC said in a statement on its decision not to challenge the about Office Depot's purchase of Office Max that smaller office supply players like W.B. Mason Co. Inc. "have demonstrated the ability to win large multi-regional and national customer contracts."

The FTC also found "little concern" from large businesses about that deal, an attitude the customers also took toward the Staples deal. (One inside counsel for a large company groused after the case that her company spent $40,000 in outside attorney fees answering the FTC's inquiries during its Staples investigation, an outlay in real money that wasn't justified by the theoretical savings that might have been provided by stopping the merger.)

The FTC came up with a very different view of the market in the Staples case, where it argued that Staples and Office Depot had an 80% share of the market as the FTC defined it. One key aspect of that definition was the FTC's decision to exclude ink and toner cartridges, which account for more than 20% of the companies' sales.

The agency said that companies such as Xerox Corp. and Hewlett-Packard Inc. often provide ink and toner as part of managed print services contracts under which companies purchase or lease printers and copies and receive maintenance on them.

Carl Shapiro, the FTC's expert witness in the case, said that managed print services companies have garnered a much larger share of the market in the last five to seven years. That may have been a defensible position, but Judge Sullivan was skeptical of it, which further undercut the government's credibility. Even had he bought the government's argument on the point, though, it suggested the dynamism of the markets in which the companies compete and thereby weakened the basis for challenging the deal.

The office supply deal faces a tougher challenge in the U.S. And arbs are still shaken from the last failure.

by Scott Stuart

The resolution of antitrust concerns in the European Union for the $5 billion merger of Staples Inc. (SPLS) and Office Depot Inc. (ODP) does not look like an indicator for the U.S. outcome, despite some similarity in regulators' concerns.

The companies announced Wednesday that they reached an agreement in Europe including an agreement to divest contract distribution business of Office Depot in the European Economic Area, and the entire Office Depot business in Sweden.

The merger has cleared other jurisdictions, including China.

The EC review focused on the effects of the planned merger on large business customers in Europe determining that the deal would result in particular competitive problems in markets for national contracts with large business customers in the Netherlands and Sweden. The focus of the Federal Trade Commission's objection to the merger in U.S. markets is similar.

The FTC complaint states that by a wide margin Staples and Office Depot are the primary vendors of consumable office supplies to large businesses in a two-player national market. Documents of the companies enforce the idea that on a national scale the two companies price against each other and that the merger would eliminate this competition.

The FTC process is scheduled to culminate in a hearing beginning May 10.

The companies have extended the merger agreement, which has renewed financing commitments, to May 16.

With the EC agreement, that antitrust authority said it cooperated closely with the Canadian Competition Bureau, which also has extended its antitrust review, and the FTC.

But the review in the U.S. is thought to be both specific to the U.S. national and even regional markets for large companies and not resolvable as easily as the EC market concerns. The companies' best argument before the FTC complaint is that the 2013 decision regarding the Office Max merger that the market is broader than the national big box retailers should prevail in the case of the Staples merger. The FTC does not seem disposed in this case to find that e-tail office supplies is a viable alternative for national corporate customers.

Staples has already offered to divest $500 million in assets to support a third competition and the FTC has rejected that notion as inadequate to maintain competition. A solution in the U.S. is not as definable as the EC resolution, an attorney said.

"You won't see an agreement akin to the EC plan in the U.S., this is going to trial and it'll play out there and be almost completely based on what Staples and Office Depot corporate customers have to say," an arb said.

An investor, a lawyer, a banker and a consultant weigh in on the effect of shareholder anger over executive compensation.

by Paula Schaap and Ron Orol

Many companies that garnered among the largest protest votes by shareholders against their executive pay plans faced activism in 2015. For example, in June 2014, Staples Inc. (SPLS) executives received only a 46% vote in support of their pay packages; six months later Starboard Value LP launched an insurgency that quickly drove the national office supply chain into a February deal to merge with Office Depot Inc. Similarly, Semiconductor company Qualcomm Inc. (QCOM) narrowly passed its say on pay vote but faced a subsequent attack by dissident Jana Partners. And just recently, after shareholders evinced unhappiness about Rovi Corp.'s (ROVI) executive pay, Engaged Capital LLC's Glenn Welling succeeded in getting himself and another dissident nominee elected to the digital entertainment company's board-even as it made last-minute changes to director pay in an effort to keep him at bay.

Given the seeming correlation between activist investor interest and negative say on pay votes, The Deal asked our expert panel of advisers to weigh in on whether shareholder dissatisfaction with compensation packages presages is, in fact, a predictor of activist involvement.

The Deal: Is dissatisfaction with executive pay packages enough to help an activist's case with institutional investors, or will dissidents need other performance problems to be able to highlight to get shareholders on board? Is there any level of compensation or any degree of shareholder outrage that would be enough, in itself, to draw an activist's attention?

M&A attorney: This whole thing on say on pay is way overblown. The whole key is how does the company perform. Most boards are cognizant of what's reasonable and what's not. But absent bad performance  for a steady period of time it shouldn't be a big issue.

Institutional investor: It is important to remember that it is the intersection of pay and performance that matters. So it is possible that in instances where poor say on pay votes are being driven by declining performance-rather than by increasing pay levels-activists may find fertile ground. But in general, activists will need more than poor say on pay to convince investors that not only are board changes necessary-which may indeed be warranted-but that the activist's specific nominees are the best replacements. And for the activist, you would certainly expect some operational turnaround or strategic alternative to be critical to driving a profitable exit.

Consultant to activists and targets: This really depends on how out-of-line the compensation practices are and what the board has done to remedy the situation.  Most activist investors are drawn to value, so governance practices and compensation arrangements are usually secondary to that.  However, if there are hidden pockets of value to be built or extracted, an activist will certainly highlight poor compensation practices as emblematic of required change.

Investment banker: Dissident shareholders cannot simply lean on dissatisfaction with executive pay and hope that issue alone will be enough to achieve board representation. Taking issue with the executive compensation of a targeted company is, however, one of the most frequently used tools in contested elections-and can even be seen in situations where the targeted company has had decent say-on-pay results. The key for a dissident when criticizing executive compensation is to credibly assert that the poor compensation practices are symbolic of overall poor board oversight.

The Deal: Last year ISS recommended against 13% of the pay packages at US companies it followed and this year the proxy adviser recommended against 7% of companies it assessed. What role, if any, do the proxy advisers play in say on pay votes and do their recommendations factor into whether an activist might decide to target a company?

M&A attorney: I think ISS is an embarrassment. I think what they say is totally irrelevant. As an organization that charges companies subscription fees [for their reports] they really don't understand any of the issues. If you get a negative ISS report, you then have to talk to the funds. So it just takes an extra bit of an effort. But you can show the funds themselves that you have a reasonable case-very few firms don't have the ability to make decisions other than those that ISS proposes.

Consultant to activists and targets: ISS and Glass Lewis wield enormous power over institutional voting decisions on compensation, but these recommendations typically do not influence whether an activist will target a company the following year.  However, if a company gets a negative vote from shareholders and subsequently do nothing about it, you can expect that company to attract additional scrutiny from all shareholders, and probably attract activists.

Investment banker: Obviously if you're drawing a negative recommendation on pay from ISS or Glass Lewis, investors will take a closer look at your compensation practices. [My firm] published a study in 2014 examining whether there is a correlation between negative say on pay and activism and we have found virtually no connection.

When the bullets are flying in a public campaign, activists will most certainly quote ISS or Glass Lewis if they have been critical of their targeted company's compensation in previous years. But we would be surprised if economic activists used these recommendations as a screening tool for finding potential targets.

Institutional investor: Proxy advisory firms do a good job at providing a first cut for investors-highlighting problem companies with both their vote recommendations and accompanying analysis-but they don't determine large investors' vote decisions. However, with pay considered a lens into a company's governance practices, and with many proxy fights coming down to a question of credibility, it makes sense for activists to take the temperature of the advisory firms' concerns at a company by looking at their say on pay recommendations.

The Deal: Who specifically do institutional investors want to hear from at companies that receive negative say on pay votes? Is it good enough to put your investor relations official on the phone to talk about the latest quarter or should the company have compensation committee directors speak directly to funds? And what do the funds want to hear?

Institutional investor: With the vote a black mark against the Compensation Committee's principal body of work, it is vital to hear directly from members of the committee. Not only is this a barometer of the seriousness with which the board is taking the vote, but it also provides the opportunity to probe-and learn from-the committee's view of pay and its connection to long-term strategy. For instance: how is the incentive structure designed to pay through the business cycle, how do vesting periods match up to investment decisions and payoffs, and what are the pros and cons of commonly used metrics such as EPS and Ebitda? At the same time, investors want to hear about the committee's assessment of its own performance and whether it needs new leadership and/or to recruit directors that can offer new perspectives.

M&A attorney: I think it varies. If it's a serious thing, you need to send your CFO or your treasurer, not just your IR person. It also depends on how big your company is. If it's smaller cap, you need a senior person. If it's Apple, I don't know if you need that. As with anybody you're talking to, you will want to have your IR guy plus some senior member of management. As to sending a member of the compensation committee, I can tell you, in the M&A context, you typically wouldn't have a member of a corporate subcommittee talk. I don't see anything wrong with it, but it's not company protocol. And if you get into issues of talking to investors one-on-one then do you have to put it into the proxy statement? Theoretically you have to do that for anything that's material-put it in the compensation statement of the proxy. If you were going to do that, you would probably have to treat it as roadshow material and file with the SEC.

Consultant to activists and targets: It depends on the size of the company, the number of institutional investors in its stock, and the size of the investor's position.  Ideally, you want the Chairman of the compensation committee to speak directly to these issues, but it may not always be practical.

Investment banker: Each situation is unique, but we would suggest that independent directors on the compensation committee would have the most credibility with shareholders. As for what the funds 'want to hear' ...  the fact is that if you're having multiple discussions with large investors about executive compensation, chances are that your company's performance has not been great. These shareholders will want to know that your compensation is largely correlated with the performance of the company and that the incentive components of the plan line up with the same things they care about (e.g., margins, ROIC, EPS) and not potentially conflicting metrics (e.g. revenue or Ebitda).

The Deal: Oracle Corp. (ORCL) failed its executive pay vote two years in a row receiving 46% in 2014 and 43% in 2013, which may have played a part in co-founder Larry Ellison's decision to step down last year. Two pension funds want the technology company to install a proxy access mechanism-is that another indicator, along with the pay issue, that might give an activist fertile ground with institutional investors to launch a campaign?

Consultant to activists and targets: I see these as unrelated. Activists, for the most part, aren't interested in proxy access.

Institutional investor: Proxy access is designed to give long-term investors a clearer voice in nominating directors at companies like Oracle that suffer from persistent governance failures. It is also an alternative and more nuanced means of achieving these changes to the activism of activist hedge funds, which can afford to take concentrated, but short-term bets on a company and its valuation. So it would be somewhat ironic for the proxy access push at Oracle to spark a push from an activist hedge fund.